A step in the right direction

This article by Isabella Piasecka was first published in Credit Today on 24 March 2015.

Isabella Piasecka welcomes the extension of “no win no fee” availability for insolvency litigation – and makes the case for it to be permanent.

Insolvency litigation has long been recognised as a special category for which “no win no fee” or Conditional Fee Agreements should be available.

The stated rationale is the public interest in assisting creditors to recover losses from rogue company directors or third parties whose actions have caused serious harm to a now insolvent business – sometimes even contributing to its demise – and in deterring wrongful behaviour. The more compelling reason perhaps is the monies it adds to government coffers by way of recouping unpaid tax.

Under the current regime, those acting on a CFA on behalf of an insolvent company can recover from the losing side both the CFA uplift, known as a success fee, as well as premiums for After The Event (“ATE”) insurance, which protects against adverse costs should the action fail. CFAs are therefore an invaluable means of funding litigation: they not only defer the substantial costs of legal action, but make those costs conditional on success. That is obviously a huge advantage for companies which are by definition without money.

On 1st April 2015, a two-year exemption for insolvency litigation from the general end of recoverability was expected to come to a close, leaving clients (and lawyers) exposed to potentially significant costs.

Just weeks before the deadline however, the Government confirmed it would extend the exemption “for the time being”, with further details of the “appropriate way forward” to follow later this year.

A 2014 report commissioned by R3, which is lobbying for a permanent exemption, says ending it could cost creditors more than £150m a year, which is the amount R3 estimates is currently realised by CFA-backed insolvency litigation. Of that, an estimated £50-70m relates to monies owed to HMRC. It is self-evident that, without the ability fully to recover costs, legal action to reclaim debts will simply be unaffordable in the majority of cases, not least for lower value claims.

Before it announced the extended reprieve, the Government had urged insolvency practitioners to explore funding alternatives, including third-party funding and Damages Based Agreements, or DBAs, which were introduced at the same time as the exemption in 2013.

Under a DBA, the costs payable by the client in the event of a win are calculated as a percentage of the damages recovered. These are capped at 50% of the total damages, and the costs recoverable from the losing side are restricted by the percentage payable under the DBA fee, as well as by the amount that would have been recoverable on a standard, hourly-rate basis, whichever is lower.

They are then a good option for the client, where the claim is high-value and speculative, and for the lawyer, where the matter will likely be quickly resolved. They remain for the most part however, unattractive, and the take-up of DBAs has so far been weak, particularly in the context of insolvency litigation. With the future of the exemption still uncertain, and unless DBAs are considerably amended, insolvent companies and their advisers looking to sue would do well to secure a CFA promptly.

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